Fee Simple? Utility Board Directors Get Less Than Peers
How do fees for utility board directors match up to those at other companies? Not too shabbily, as the following data show, but...
of information to investors, the company's ability to generate ongoing cash flow is, generally speaking, a larger determinant of value.
In defining the purpose of a statement of cash flows, the first objective mentioned by FAS 95 is "to (a) assess the enterprise's ability to generate positive future cash flows." To facilitate this assessment, cash generated or used by operations must be separated from cash generated or used by investing and financing activities.
This required distinction is both an inevitable source of "noise" in the information (because it requires subjective judgments by management) and an opportunity for willful distortion. No investor should believe that focusing on cash is a remedy for the kind of manipulation that, say, WorldCom has admitted to. If current expenses are improperly treated as capital investments to inflate net income, operating cash flow will necessarily be inflated as well.
Even if the distinctions between cash flows from operations and cash flows from investing and financing could be made correctly and were perfectly transparent, other impediments remain to using the Statement of Cash Flows to achieve its primary purpose. Most non-accountants would assume that if a company makes microprocessors, then cash flows from operations is the difference between cash collections from the sale of microprocessors and the cash outflows from making and selling them in the current period. This straightforward expectation is reflected in FAS 95: "Operating activities generally involve producing and delivering goods and providing services."
This information, combined with other data on the company's external environment, would then provide a basis for forecasting the ability of the microprocessor business to generate future cash as well. Calculating cash flows from operations is not, though, as simple as measuring the net cash receipts from making and selling goods and services over a quarter.
To begin with, cash from operating activities is a residual-both in its definition and in the way companies typically compute it. Although FAS 95 directly defines operating, investing, and financing activities, it states: "Operating activities include all transactions and other events that are not defined as investing or financing activities." "Operating cash flows" is the default category. In practice, companies often start with the overall change in cash. Cash changes resulting from financing and investing activities are then determined, since these tend to be events that are relatively easy to identify. The residual is cash from operating activities. 3 As a result, the financing and investing components of the statement of cash flows are easier to understand than the operations component, even though it is the most essential component for understanding the value of the enterprise. The fact that cash flow from operating activities includes the results of other events that may not be relevant for inferences about "the enterprise's ability to generate positive future net cash flows" is clearly recognized by credit rating agencies, which make their own alterations to the statement of cash flows to produce non-GAAP "funds from operations" (FF0). 4
The Composition of Operating Activities: The Adjustment Quagmire
The "indirect" method virtually all companies use for presenting operating cash flows on the